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Mon 22 Dec 2014 21:17 GMT
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Advantages and Disadvantages of Pensions

Advantages and Disadvantages of Pensions
Published:  22 Feb at 7 PM
The advantages of pensions are obvious. Saving up for your retirement is off the utmost importance because unfortunately but unavoidably, the government pension plan is not enough for most people to live comfortably on. Whilst there are obviously other saving options for individuals looking to put money away for their future, the pensions tend to be the most popular option due to the large tax advantages that come with this form of saving. An example of this is the fact that your savings are given an added boost in that the Inland Revenue essentially reimburse all of the tax that you have paid on the money that you have saved in your pension. It also means you are not required to pay capital gains tax which is just an additional way of making more from your money by putting it in a pension. Other saving options would probably not benefit from these tax breaks so you would save a lot less from the same financial contributions.

Another reason is that is what is referred to as a “standard arrangement” that is managed on your behalf and all you have to do is keep an eye on it and keep adding a bit of money each month - how much depends on you and your circumstances.

The advantage that pensions have over other retirement planning options is not just limited to the amount of tax advantages as they are also somewhat safer than other options. As they are closely monitored and very strictly regulated, should anything go wrong or if you were to be hard-done by the provider it is much more likely that you would be eligible for some form of compensation that with most providers. Finally, these savings are invested as pensions which results in a much more significant interest rate through compound interest.

However, few people understand the numerous disadvantages of using a pension plan to save money for the future. For example, even if you choose a flexible pension plan that has fair fees paid for management and other ongoing charges, one of the biggest disadvantages is that in most pension plans, you are unable to access the money that you have invested into the pension plans. This can be a major negative if you are struggling to pay medical bills or to prevent your business going under but at the same time, the more likely use is people looking to pay for a child's first car or a holiday in the Caribbean in which circumstance the inability to withdraw money from the pension is a valuable advantage.

The most frequently debated issue in recent times is that you are legally required to purchase an annuity when you reach 75. This is a problem as some of those who may be in poor health are required to hand over their total saved amount in return for a much smaller amount each year, even though they know the chances of them living past the next couple of years is very unlikely. The government thought-process is understandable as they aim to prevent people blowing all their retirement fund in the first couple of months and instead be responsible, but it is a very flawed plan and one that is unlikely to remain unchanged for the next few years ago.

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